Site Mobile Navigation

AOL Is Expected To Announce Big Policy Shift

In a pivotal and long-awaited presentation to investors, AOL Time Warner is expected to disclose a radical shift in strategy for its flagging AOL division today, switching the emphasis away from selling Internet access and toward selling an add-on high-speed version of its service to customers who may buy high-speed Internet access from phone or cable companies.

Jonathan Miller, the recently named chairman of the AOL division, will disclose the latest plans to turn around AOL in a four-hour briefing with investors in New York. After growing exponentially until last year, AOL is suffering from steeply declining advertising revenue, slowing subscriber growth, rising costs to reach customers over high-speed cable or other connections, and stiff competition from cheaper high-speed services.

Analysts say Mr. Miller's presentation may be decisive in determining whether AOL contributes to AOL Time Warner's future growth or languishes as a costly liability. The company has increased the suspense by maintaining a strict silence on the details of its plans for about three months, although some details have leaked out, like AOL's new reliance on content from its sister companies like Warner Brothers and Time Inc.

The redirection in emphasis toward selling an add-on high-speed or broadband service will entail a big change in the company's image with consumers, most of whom continue to think of AOL as a company that connects people to the Internet, rather than as a suite of extra content and services. AOL had previously focused primarily on selling access to the Internet over phone lines, and more recently on making deals with telephone and cable companies to sell access over their wires under its own name.

But the growth in the low-speed Internet access business has begun to decline. And deals to carry AOL's high-speed service over cable or phone lines have been hard to reach and costly since many cable and phone companies have competing services. Thus, an add-on broadband service appears to be AOL's best option. (In some ways, its add-on service resembled a subscription version of the free Web site Yahoo, although AOL executives say their size and subscription revenue will enable them to offer more robust content and shopping discounts.)

AOL currently offers an add-on broadband service for about $15 a month, which is available to customers who also buy high-speed Internet access from someone else for about $40 a month. But until now AOL has barely marketed the add-on high-speed service for fear of cannibalizing its profitable low-speed subscribers. AOL executives say that few members appear to know that the add-on service exists. Perhaps as many as half of the roughly four million people who get access to AOL through a high-speed connection do it by continuing to pay $23.95 for their subscription to AOL over a phone line even after they pay someone else $40 a month for high-speed access, effectively overpaying.

AOL's new emphasis also carries new risks, because providing service over broadband connections is more costly and less profitable than its main business of selling low-speed Internet access over phone lines. AOL also needs to persuade users that its service is worth $15 more, even after buying high-speed access. Some analysts hoped AOL would lower the price from $15, but people involved said it would remain the same for now. An AOL Time Warner spokesman declined to comment.

Mr. Miller is expected to tell investors that the company is also changing its approach to its existing low-speed business to adjust to the slowing growth of this business, people involved said. Borrowing tactics from its sister company, Time Inc., AOL will seek more profit from each user instead of breakneck growth, people involved said.

The company will spend less heavily on marketing and free trials while seeking to squeeze more dollars out of each subscriber. Among other things, AOL will seek to categorize its members according to the ways they use the service -- for example, sending more offers to buy extra features to consumers who like them or providing less-attentive customer service to less-profitable users.

An error has occurred. Please try again later.

You are already subscribed to this email.

But the toughest question Mr. Miller will face from Wall Street pertains to AOL's future advertising revenue. AOL's advertising revenue has plunged steeply this year as the company has been unable to replace the many enormous long-term advertising deals it made during the peak of the Internet boom -- and as more old deals expire, some analysts wonder if there is any future for AOL's advertising business.

People involved in AOL's planning said that Mr. Miller would seek to redirect investor attention toward the current, much slower growth in new advertising deals. Mr. Miller is expected to tell investors that although AOL's advertising revenue may continue to decline through 2003 as its old deals fade away, the company will disclose more details of its new, more conventional advertising sales so that investors can see the company beginning to rebuild, albeit at a much slower pace. Mr. Miller may showcase examples of recent advertising deals to illustrate AOL's post-boom potential.

To help make up for the higher cost and lower profit margins of providing high-speed access, Mr. Miller is expected to tell investors that AOL will begin to sell its members more premium services, including protection from Internet viruses, versions of existing features to answer the phone while a user is online, or subscriptions to the planned MusicNet download service.

Mr. Miller will also discuss some of the company's early steps to bolster its online commerce, in both its high- and low-speed services. These include selling music to users directly instead of referring them to other online shopping sites. AOL is also expanding its sales of discounted, remaindered merchandise.

To attract and retain members, AOL is also seeking to provide more distinctive audio, text and video content on low- and high-speed services. These people said the company planned to rely heavily on paying its sister companies like Warner Brothers, Turner Broadcasting and Time Inc. for their properties. For example, people at Time Inc. said that the online editions of Entertainment Weekly, People, Teen People, InStyle, Time for Kids and Sports Illustrated for Kids would now appear exclusively on AOL, in part because they fit with the demographics of its users, many of whom are women and teenagers.

AOL is also shifting away from simply selling other companies the right to operate its topical ''channels.'' Mr. Miller is expected to tell investors that the company plans to begin providing its own content for certain channels, including the channels about sports, music, children and video games.

But people involved in the process said the company also planned to keep a tight grip on its budget. A person involved in the process said all of AOL's new investment in providing more content will still remain less than 10 percent of its cash flow. The broadband version of the AOL service will also include plenty of promotional samples of new films, DVD's, television shows, record albums and video games, which cost little or nothing. The word ''exclusive'' will continue to be splashed liberally around the site in an effort to lift subscribers' sense of the site's value.

Mr. Miller will also demonstrate a prototype of the next version of AOL's software, AOL 9.0, which will illustrate some of the company's efforts to fuse its strength in online communications with its new emphasis on online content. For example, it will make it easier for users to chat with other members while they are all watching the same video or listening to the same music online.